Does the structure of state budget matter for Egypt’s fiscal deficit? An empirical investigation using an ARDL bounds testing approach

ABSTRACT

The current study contributes to the existing literature by investigating the relationship between structure of the State budget and fiscal deficit-to-GDP ratio in Egypt over the period 1981/1982–2020/2021. The dynamic relationship between the examined variables is tested using an Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration. The study finds an empirical evidence that supports the hypothesis that budget structure matters for fiscal deficit in Egypt. A higher share of investment expenditure in total government expenditure is correlated with a lower fiscal deficit-to-GDP ratio in the long- and short-run. The share of taxes in total government revenue is found to be negatively (positively) associated with the fiscal deficit-to-GDP ratio in the short-run (long-run). In addition, the current account balance is found to be negatively correlated with the fiscal deficit, in the long-run, which supports the ‘twin deficits hypothesis’ and the ‘current account targeting hypothesis’. Furthermore, the study finds a unidirectional Granger causality relationship that runs from fiscal deficit to government investment expenditure.

KEYWORDS:

• State budget
• fiscal deficit
• government expenditure
• government revenue
• ARDL
• Egypt

JEL CLASSIFICATIONS:

• C22
• E62
• H20
• H50
• H60
• H61
• H62

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For further details on the theoretical basis of the role of infrastructure investments in enhancing economic growth, see: Aschauer (1989a, 1989b); Munnell (1990a, 1990b); and Hulten and Schwab (1993).

2 For further details on the importance of human capital investments for economic growth, see: Romer (1986); Lucas (1988); Kumar (2006); and Buysse (2002).

3 See for instance: Eisner (1987); Martin and Fardmanesh (1990); Ramangkura and Nidhiprabha (1991); Haque and Montiel (1991); Easterly and Rebelo (1993); Eken et al. (1997), Chakraborty (2002); Sarker (2005); Raju and Mukherjee (2010); and Dalyop (2010).

4 It is worth mentioning that all capital revenues are excluded from the second revenue chapter ‘grants’ and the third revenue chapter ‘other non-tax revenue’ when calculating total public revenue for the period from FY 2005/2006 to FY 2020/2021. This amendment is necessary to ensure consistency with the old budget classification system that prevailed during the period (1981/1982-2004/2005), according to which ‘capital revenue’ was classified together with ‘lending proceeds and sales of financial assets’ in one chapter. Accordingly, the fiscal deficit measures presented in this analysis are overestimated.

5 Primary deficit is calculated here as the difference between cash deficit and interest payments.

6 It is noteworthy that data on the current account balance is measured based on calendar, rather than fiscal, years.